Energy is on a run and U.S. refiners look like the best way to profit

01/29/2013 3:52 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Quick, name the best performing sector for 2013 to date.

Did you say energy? The sector is up 8.6% for the year as hopes for global growth (or is that hopes of Chinese growth?) drive visions of growing global demand. West Texas Intermediate crude is up another 1% today and Brent crude is up 0.6%.

Shares of U.S. refiners with geographic exposure to the U.S. oil boom in regions such as North Dakota’s Bakken formation or Texas’ Permian Basin have done as well—HollyFrontier (HFC) is up 8.4% in 2013—or better—Marathon Petroleum (MPC) is up 13.9%.

And going forward I think refiners with U.S. oil boom exposure are likely to outperform in any dip in the sector created by worries that higher oil prices will put a damper on global growth.  (Well, oil prices could at some point. At $97.40 a barrel for West Texas Intermediate and $114.16 for Brent, oil is near the point where its price does start to bite into growth.)

Why are U.S. refiners a good bet to keep climbing even in a dip for the rest of the sector? Because the revenue and earnings growth story here doesn’t depend just on global growth. These refineries also stand to benefit from increasing production from U.S. onshore fields and from lower prices for the oil they buy to refine as more of this production reaches existing refineries as transportation capacity increases. (This is also the thesis behind my pick of Targa Resources Partners (NGLS), a pipeline master limited partnership that has just acquired its first pipelines serving the Bakken fields. Targa is a member of my Jubak’s Picks http://jubakpicks.com/ and Dividend Income http://jubakpicks.com/ portfolios) Oil from U.S. onshore producers is currently selling at a discount to global oil prices because of a lack of the cheapest infrastructure—pipelines—to get it to market. That means a bigger margin for U.S. refiners like HollyFrontier and Marathon as they get increased supplies of this oil.

The edge won’t last forever. As it gets easier to move this oil to market, the price will move toward the world price. And so many refiners have announced plans to build new plants in the United States that the sector is certainly looking at overcapacity in the not too distant future.

But I’d put both developments off until 2014 or 2015. And in the meantime I think U.S. refiners like these can expect very juicy—and increasing—margins.

HollyFrontier was up 5.28% today as of 3 p.m. New York time. Marathon Petroleum was up 4.51%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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